Q3 2023 Nova Ltd Earnings Call
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Good day and welcome to the Nova Limited third quarter 2023 results conference call.
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I would now like to turn the conference over to MS. Mary Siegel CEO of MSI are.
Please go ahead.
Yeah.
Okay.
Welcome all of you to Nova's third quarter 2023 financial results conference call.
With us on the line today are Mr.
Eisman, President and CEO and Mr. Dror, David CFO.
Before we begin may I remind our listeners that certain information provided on this call may contain forward looking statements and the safe Harbor statement outlined in todays earnings release also pertains to this call and.
He feels not received a copy of the release. Please view it in the Investor Relations section of the company's website.
Gaby will begin the call with a business update followed by Dror with an overview of the financials.
We will then open the call for the question and answer session.
I'll now turn the call over to Mr. Guffey, Weisman, Novas, President and CEO.
Please go ahead.
Thank you Mary and welcome everyone.
Third quarter financial results conference call.
We'll start the call today by speaking about our quarterly performance highlights and the market dynamics as they relate to Nova.
Following my commentary Bob will review the financial results in detail and present the guidance for the fourth quarter.
No one's performance this quarter exceeded the company's revenue and profitability guidance.
And our goal is to maintain civil similar business level in the next quarter as well, making the second half of 2020 free stronger than the first.
These results once again demonstrate the strength of our diverse portfolio.
Given by our expanding exposure to new application and our ability to leverage market opportunities.
<unk> revenue and margin in this quarter and in 2023, thus far validates our flexible and resilient business model.
As well as the actions we took over the past year to address changes in the market.
As we look ahead towards 'twenty 'twenty, four we expect Nova to resume its growth and outperformance trajectory.
We were able to deliver better results than our earlier projections by adding several new customers by leveraging the growth in all materials metrology offerings by increasing the adoption of new technologies in our chemical and optical metrology solution and by the growth of our service.
Isn't it.
In every one of these areas, we continue to execute and push forward in accordance with our long term strategic plan to reach $1 billion in revenues.
Before I turn to review some of the business highlights of this quarter I'd like to address the situation in Israel and its implications for Nova.
Nova is first and foremost committed to supporting our customers and meeting delivery times and business obligations.
We have a well prepared and bought our business continuity plan in place designed on a global basis.
Our global operations continue to run as intended and there has been no impact on our performance and no disruption to our delivery schedule.
Thanks to the commitment and dedication of our employees.
We appreciate the support and trust, we received from our customers suppliers and the investment community and we are resolved to continue and conduct business. According to plan.
Now, let's turn to the business highlights of the third quarter.
We noted that we expect the company to return to a growth trajectory in 'twenty 'twenty four and already we can observe the seeds of the main drivers of this growth.
The most encouraging sign is a restored balance between memory and foundry logic, which was largely skewed over the past year.
In Q3, our memory sales grew by more than 75% compared to the previous quarter and amounted to 35% of our product revenue.
We expect this trend to continue into Q4.
With DRAM investments, including high bandwidth memory acting as the main driver while NAND showed signs of stabilization.
As evidence of the format, we have two new DRAM implementation of Nova PRIZM and Nova Vera Flex of the most advanced version of the platform.
I want to note the opportunity we see in memory offerings for our SBS technology.
Despite some demand softness in 2023.
Vera Flex platform failed hit a record high this quarter and further expanded its customer base.
Moreover has the tools, we manufacture for our most advanced version of the platform the reflect four which significantly reduces the cost per measurement and provides a much higher value for the customer.
In addition to this ongoing demand <unk>.
<unk> offers a unique value and its capacity to solve specific highly advanced applications.
While in the past these applications have been driven by logic manufacturing, we now see them rapidly evolving into both DRAM and NAND production.
And nobody has experience in this domain is generating high demand and rapid adoption.
Okay.
Ladies and gentlemen, we seem to have lost the management line. Please stay with us while we reconnect with the management.
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Ladies and gentlemen, we thank you for your patience, we have the line for the management reconnected.
Kevin You May please go ahead.
Thank you operator.
Another growth driver is our innovative and unique technologies and portfolio.
Let's take for example, the proliferation of our elite some materials metrology platform.
Already have multiple systems at customer sites, we have received several repeat orders.
And the system has been selected by customers as the tool of record for advanced node.
Due to its ability to provide device performance indicators previously available only via electric testing.
This selection as tool of record reflects the potential for additional orders as production transition to high volume manufacturing.
We are seeing more process steps diverted to the system displacing other metrology techniques and folding applications on the device measuring unique material characteristics that in the past, we're limited to test structures and blankets wafers.
Furthermore, as in the case of their afflict initial demand.
I'm from advanced R&D gate, all around applications, but now we see new in line with reality applications in memory devices.
That we're simply not performed before Alexon became available.
And if we look at metrics on here too we have a growing customer base and we expect to add some of the world's leading global logic and memory manufacturers to the list by the end of 'twenty 'twenty four.
Another growth stimulus.
Jim in the form of a recent sale of another fifth machine learning software solution to a leading global manufacturer <unk>.
Driven by a new capability.
Macro.
Macro provides high resolution full wafer assembly for early detection of process excursion.
<unk> increased physical wafer measurement and leading to a faster yield learning curve and improved process control.
The third engine to propel our business in 2024 is advanced packaging.
An area, where we see multiple achievements and opportunities for Nova.
The Nova PRIZM tool was recently selected by a leading foundry as part of its most advanced node toolset to address hybrid bonding process applications and additional advanced packaging metrology challenges.
We have initial orders for multiple systems with more expected use of prison unique ability to make robust measurement and the presence of underlay variation.
<unk> ability critical to effective production.
Following a highly successful demo and another leading logic manufacturer is also evaluating PRIZM tool for advanced packaging applications, such as Bruce Silicon via.
Is the better and more effective alternative to its current center.
In addition, we recently received orders for integrated metrology and for Nova direct metal replenishment solution targeted for advanced packaging from leading memory customers.
Elsewhere, we are working closely with our customers to bring vital capabilities to bear on problems they encounter.
We reach inflection point in CMP and plating processes of advanced packaging and face unprecedented challenges.
Finally, I want to highlight our service business, which secured record high revenues this quarter.
While current utilization levels may impact short term growth rates, we've often offset this effect by increasing the contract portion of our total service revenue by approximately 20% year over year.
With that I would like to recap our third quarter results.
Nobody had a strong quarter against the backdrop of market softness.
In an increasingly complex environment.
As we look ahead into the next quarter and the coming year, we expect to continue our strong execution.
We trust that the fundamentals of both our company and the semiconductor industry will see Europe into a trajectory of growth and outperformance.
Okay.
Before I turn it over to draw I'd like to thank our global and Israeli teams for their support commitment resilience and dedication.
We are fortunate to have an incredible team that is committed to our success.
Now for some more details on the financials, let me handover the call to Dol.
Thanks, Robbie and good day, everyone and thank you for joining our 2023 third quarter conference call.
Total revenues in the third quarter of 2023 were 129 million exceeding the company guidance for the third quarter as a result of several specific customer poolings of delays of deliveries originally scheduled for the fourth quarter of 'twenty three.
Product revenue distribution was approximately 65% from logic and foundry and approximately 35% from memory.
Product revenues included four main territories and four main customers this contributed 10% or more each to product revenue.
The continued wider territory distribution reflects continued territorial diversification driven by increasing investments from the western territories of the U S and Europe.
Yeah.
Blended gross margin in the third quarter was 56% on a GAAP basis, and 58% on a non-GAAP basis within the company non-GAAP target model of 57% to 59%.
Following cost containment measures implemented by the management to align expenses with the current business environment.
Operating expenses in the third quarter decreased by approximately 10% relative to the previous quarter and came in at $38 million on a GAAP basis and.
$35 million on a non-GAAP basis.
Operating margins in the third quarter were 27% on a GAAP basis, and 31% on a non-GAAP basis at the high end of the company's non-GAAP target model of 27% to 31%.
Financial income in the quarter remained elevated following higher yields on cash reserves and came in at $5 million.
The effective tax rate in the third quarter was approximately 14%.
Earnings per share in the third quarter exceeded company guidance and were $1 <unk> per diluted share on a GAAP basis, and $1 23 on a non-GAAP basis.
In terms of cash flow for the fourth quarter, the company generated $43 million in free cash flow.
Constituting more than 30% of total revenues.
Finally, I would like to share the details of our guidance for the fourth quarter of 'twenty three.
Currently we expect revenues to be between 123 million to 132 million.
GAAP earnings per diluted share to range from 96 to.
The $1 11.
And non-GAAP earnings per diluted share to range from $1 16.
The $1 31.
At the midpoint of the fourth quarter estimates, we anticipate the following.
Gross margins to be approximately 56% on a GAAP basis, and approximately 58% on a non-GAAP basis at the midpoint of the company non-GAAP targets Morgan.
Operating expenses to increase to approximately $42 million on a GAAP basis and $37 million on a non-GAAP basis.
Looking forward, we expect operating expenses to gradually increase in 2024.
Financial income to be similar to that of the third quarter.
And the tax rate to be approximately 8% in the fourth quarter of the year.
Lower than the companies, 14% model due to end of year tax adjustments and statute of limitation.
Taking into consideration the midpoint of the fourth quarter guidance, we expect the company to conclude 2023 with an excellent non-GAAP profitability metric.
Approximately 59% in blended gross margin.
And approximately 30% in operating margins.
Both at the higher end of the company's target model.
This expected exceptional performance reflects the company's agile and resilient operational model in different business scenarios.
The increasing value of our new product generations, and the prudent cost control initiatives implemented by the management earlier this year.
To conclude my remarks, I would like to highlight the case reserves of the company, which increased to $614 million and provide the required flexibility to pursue organic and nonorganic business development activities towards executing the company's one bill.
<unk> strategic plan.
With that I will turn the call back to Gavin Gabby.
Thank you Dror.
Third remarks are now concluded we would be happy to take your questions operator.
Thank you.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If you are using a speaker phone.
Please pickup your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question.
Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
The first question comes from Vivek Arya with Bank of America Securities.
Please go ahead.
Alright. Thank you for taking my question and I hope the team is putting up all our best wishes.
For my first question I'm curious what your assumption is for kind of a baseline <unk> of fee growth in calendar 'twenty four because you are doing what you've added exiting this year. So I'm curious how you are thinking about just the market growth and then the drivers of share gain has as I look at where sort of broad investor expectations are for them.
For next year, that's sort of in the mid teens kind of sales growth.
So I'm just curious what do you think the market is doing and what could be the potential drivers of this kind of growth for NOLA for next year.
Our assumption for next year based on the market.
The research that we have and also some feedback from the customers. Obviously, we are in the process of planning next year is that the market will grow.
In the mid single digit levels in 2024.
Okay.
Okay.
<unk>.
Let's see what kind of gain share.
As part of that mid single digit growth environment.
So I mentioned the growth drivers that we have for 24.
And Bo far materials metrology.
<unk> as well as advanced packaging.
So both are going to drive of course, alongside with adoption of our new technology and generations of tool.
Take up in 2024.
Okay, and then for my a quick.
Follow up I'm curious how much is the packaging exposure for Noah.
And where do you think it gets to next year.
So we've seen the adoption of <unk>.
Both our dimensional metrology and material metrology tools and advanced packaging together with the chemical metrology that has been traditionally in packaging and now of course, driving some of our business in high bandwidth memory and this is a.
I would say in the initial steps of adoption, but we have seen this year that the business grew over 40% and we expect it to continue and grow further in 2024.
Thank you.
Thank you.
The next question comes from Charles <unk> with Needham and company. Please go ahead.
Hi, Good afternoon, Debi Jordan. Thanks for taking my question I wanted to start with.
Very strong result, coming from the memory end market.
If I look at the <unk>.
After our revenue reported in Q3, it looks like on a run rate basis.
Already probably above last year's.
Memory revenue for the whole year, so really kind of curious.
The dynamic.
Here you are seeing is a little bit different but can you kind of break down break it down why memory was doing so well in Q3 provide a little bit more color on the standards.
The key technology adoption standby that but more importantly, what's the foundry logic to memory.
That's split into the next quarter do you expect more of the same or or maybe some of the memory strength may require back.
But I'll just kind of curious thanks.
Definitely Charles So first in terms of the ratios go in Q4, I believe it will be around a similar level as in the third quarter related of course to the memory side of the business and with regards to the our memory pickup.
Especially in DRAM in high bandwidth memory, but not the only we've seen the adoption of our material metrology.
Portfolio gain applications that fourth traditionally driven or adopted.
By logic into memory as well, so it's the new customers and additional applications.
Driving that alongside with the adoption of the Nova PRIZM.
Which is offering a unique technology.
With the underlay variation capabilities.
That offer a superior solution.
To our competition.
Got it.
So maybe a quick follow up.
China I mean.
One Chinese customer, which.
U S. P. As previously thought they couldnt ship to that particular customer they are kicking in second half. This year was that particular customer contributing to some of the Q3 strength.
The answer is yes.
Thanks, Ross So maybe the next question I wanted to ask.
Just a follow up to me.
That's question <unk>.
Market assumption for next year of 5%.
I mean is that mid single digit I want to correct.
Young year next year.
Whats half over half qualifier youre seeing is backed by first half more or less.
I mean spending the second half 'twenty three run rate and there may be a recovery in the second half or you are seeing something like a more gradual more linear into next year.
So we believe that the second half of next year is going to be stronger than the first half driven by our leading edge and <unk>.
Recoveries in the memory side.
Got it so is it the financial assume like a first half probably I mean, maybe this is more specific to your business you've probably will also try to keep the business at that similar level ads.
Q3, Q4 this year.
So Charles.
We obviously are not giving specific guidance is for a specific orders beyond the fourth one so.
Yeah fair enough. Thanks.
Sure.
Thank you.
The next question is from <unk> <unk> with Jefferies. Please go ahead.
Hi, Thanks for taking my question.
The first one I wanted to double click on.
Tony.
Go ahead Jason.
No I understand that it is driven by adoption of Kjell Magee.
Sure.
But could you give us a song.
What's the technology <unk>.
That's correct.
Does something different.
Good luck to Hawaii.
Boy that is pushing the adoption.
So thank you for that.
Basically first and foremost I'd like to highlight the fact that it's driven by material metrology adoption, but not only so we see this across the board.
With both our optical and chemical and specifically I mentioned also the orders we received from memory customers.
Our direct metal replenishment, which is part of the chemical metrology offering that we have which is also of course, the driving some of that growth related to high bandwidth memory. In addition, what you're asking is is interesting and related to two two.
The two product platforms, one of the very flex in.
Which we can see some of the.
Gabled around applications.
We're initially driving.
The adoption and Xps, we see those.
Some of those applications.
In memory devices as well and also we see the adoption of Alexander.
And that perspective.
As an enabler to some of those applications that were.
<unk> performed well before or are now enabled by <unk>.
By this a solution as well so all of those are offering I would say I would not necessarily say an inflection point in the in the DRM, specifically, but definitely an inflection point for us in terms of the adoption of both.
Both of those platforms that I mentioned.
Got it and so maybe maybe pushing on that.
Okay Jay.
Company wide Kevin <unk>.
Michael Macdonald.
Thanks.
J J E D.
DRAM type applications, HBM, Versace, and Jimmy Choo.
So HBM in the third quarter was relatively low we expect it to.
To become stronger in the fourth quarter. So most of that was driven by the adoption of the materials metrology solution.
And in part of course by optical.
Okay got it.
And then for my second question.
Foundry logic could you could you give us a sense.
Yes.
Trailing nodes.
Comment on that.
Jamie Bryan pockets of weakness.
So obviously the ratio of our trailing nodes is relatively still high or relatively high.
But we expect the advanced nodes to take the lead.
Sometime I would say in the first half of next year.
Thank you.
Is that finally, Kevin.
Hey, Bill.
So most of the company has talked about 2025.
And so you'd start to see that by mistake.
Sure.
Tony.
Correct.
Alright, thank you.
Sure.
Alright.
The next question comes from Mark Miller with the Benchmark Company. Please go ahead.
Oh, congratulations on your quarter and outlook and just wanted to get a little more understanding you said there were pull ins from the fourth quarter was that.
Was that due to memory.
Typically high bandwidth memory I'm, just wondering what coinsurer.
Driven by.
Yes.
These buildings were around memory, but not only H b.
Okay.
Taiwan semiconductor announced that it was pushing out it's one of its first tower Zona plant due to staffing has that had any impact on your backlog or any impact at all.
Your forecast.
So we are working very closely with our with all of our customers and naturally with keep a very close.
Contact in order to understand the exact the delivery plan.
So we are working closely with all of our customers, including patch, one and making sure that.
Were fully aligned.
We have approved.
So in the third quarter as well and I expect it to continue on the fourth quarter.
Thank you.
Okay.
Thank you.
This concludes our question and answer session.
I'd now like to turn the conference back over to Mr. Guffey Weizmann.
<unk>, President and CEO for any closing remarks over to you Sir.
Thank you operator, and thank you all for joining our call today.
Okay.
Thank you.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
Operator.
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